Entrepreneurship, knowledge, and the industrial revolution

This paper constructs a two-sector unified growth model that explains the timing and the inevitability of an industrial revolution through entrepreneurs’ role for the accumulation of useful knowledge. While learning-by-doing in agriculture eventually allows the preindustrial economy to leave its Malthusian trap, an industrial revolution is delayed as entrepreneurs of the manufacturing sector do not attempt invention if not much is known about natural phenomena. On the other hand, these entrepreneurs, as managers, serendipitously identify new useful discoveries in all times, and an industrial revolution inevitably starts at some time. The industrial revolution leads the economy to modern growth, the share of the agricultural sector declines, and the demographic transition is completed with a stabilizing level of population in the very long run. Several factors affect the timing of the industrial revolution in expected directions, but some factors that affect the optimal choice of fertility have ambiguous effects. The analysis almost completely characterizes the equilibrium path from ancient times to the infinite future, and the model economy successfully captures the qualitative aspects of the unified growth experience of England.